Bulls Continue To Have Benefit Of The Doubts As Long As S&P Holds Above 3500

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday November 11, 2020.

We’ve noted in the previous Market Outlook that: “the spinning top candlestick pattern in the S&P together with overbought conditions suggested that market is at or very close to a significant near-term top. Near-term risk is to the downside.  Traders should consider buying downside protection on winning positions.”  As anticipated, S&P closed lower Tuesday, fell 0.1 percent to 3,545.53, as a market rotation out of names that thrived during the pandemic and into stocks linked to an economic recovery continued.  The Nasdaq Composite slid 1.4 percent to 11,553.86.  The Dow Jones Industrial Average rose 0.9 percent to 29,420.92.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell nearly 4 percent to 24.80.

Oil prices rose on Tuesday as hopes that a COVID-19 vaccine could be on the horizon outweighed the expected negative impact on fuel demand of new lockdowns to curb the virus.  Brent crude futures rose 53 cents, or 1.3 percent, to $42.93, while U.S. West Texas Intermediate (WTI) crude futures settled up $1.07 cents, or 2.7 percent, to $41.36.  As such, the Energy Select Sector SPDR Fund (XLE)  jumped more than 3 percent on the day but is down more than 43 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLE.

The graphics below are from our “U.S. Market Trading Map”, show the near-term technical bias and trading ranges.  As shown, the underlying is in a short-term bullish trend when the price bars are painted in green.  The underlying is in a short-term bearish trend when the price bars are painted in red.  The yellow bars identify period of neutral or sideways trading pattern.  Additionally, the light-blue shading represents the short-term trading range.  A move above or below that range is considered overbought (as represents by the red shading) or oversold (as represents by the dark-green shading).  Readings above or below the red and green shaded areas are considered extremely overbought or extremely oversold.

Chart 1.1 – Energy Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLE bars in green (buy) – see area ‘A’ in the chart.  Over the past few months, XLE has been trending steadily lower after the late March recovery rally ran out of steam near the 38.2% Fibonacci retracement.  The June downswing found support just above the March low.  This week’s bullish reversal signal suggested that an important near-term low has been established and XLE is in an early stage of a new upswing that projects to 40 at a minimum but has an overshoot target over 46.

The late October low, around 27, represents the logical level to measure risk against.  All bets are off should XLE close below that level.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains bullish (buy).  Last changed November 3, 2020 from bearish (sell) – (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

S&P moved down to test support at Monday’s bullish breakaway gap after recent rally attempt ran out of steam near the upper boundary of its short-term trading range.  That level roughly corresponds with the important sentiment 3500 mark. Momentum has been weakened but the indicator is much closer to overbought zone than oversold zone.  Money Flow measure hovers above the zero line, indicating a positive net demand for stocks.  So it should not be surprised to see at least a rally attempt in the coming days.  S&P has 3500 to trade against. If that were to break, we would see 3400 next.

Short-term trading range: 3500 to 3650.  S&P has support around 3500.  A failure to hold above that level has measured move to around 3400.  Resistance is around 3650.  A sustain advance above that level has measured move to 3780.

Long-term trading range: 2750 to 3730.  S&P has support near 3200.  A failure to hold above that level has measured move to 3100.  The index has resistance near 3700.  A close above that level has measured move to 3900.

In summary, while market is overbought as S&P moved down to test key price level, market internal remains supportive of further advance.  While some backing and filling would not be a surprise, the bulls will continue to have the benefit of the doubts as long as S&P holds above 3500.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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